West Bancorporation, Inc. — 2018 Q1 Form 10-Q Summary
Business context and reporting period
West Bancorporation, Inc. is an Iowa-based bank holding company operating through West Bank in central Iowa, eastern Iowa and Rochester, Minnesota. This unaudited filing covers the three months ended March 31, 2018, with comparisons to the three months ended March 31, 2017 and balance-sheet comparisons to December 31, 2017. Dollar amounts are in thousands except per-share data.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net income | $7,384 | $6,106 | +20.9% |
| Diluted EPS | $0.45 | $0.37 | +$0.08 |
| Net interest income | $15,416 | $14,389 | +7.1% |
| Provision for loan losses | $150 | $0 | +$150 |
| Noninterest income | $1,913 | $2,160 | -11.4% |
| Noninterest expense | $8,287 | $8,043 | +3.0% |
| Net interest margin, FTE | 3.16% | 3.48% | -32 bps |
| Return on average assets | 1.42% | 1.35% | +7 bps |
| Return on average equity | 16.79% | 14.80% | +199 bps |
Income before taxes was $8,892 versus $8,506. Income tax expense declined to $1,508 from $2,400, with the effective tax rate falling to 17.0% from 28.2%, primarily because the Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% in 2018. The company declared a $0.18 per-share dividend for the quarter and subsequently approved a $0.20 quarterly dividend payable May 23, 2018.
Net cash provided by operating activities was $9,573, compared with $7,076 in the prior-year quarter. Cash used in financing activities was $26,653, principally reflecting a $72,655 decrease in deposits, partly offset by a $51,275 increase in federal funds purchased. Cash and cash equivalents declined to $37,466 at March 31, 2018 from $47,949 at year-end 2017.
At March 31, 2018, total assets were $2,092,025, down 1.1% from December 31, 2017. Loans were $1,502,283, down $8,217, while net loans were $1,485,818. Total deposits were $1,738,158, down $72,655. Federal funds purchased increased to $51,820 from $545. Stockholders’ equity was $178,242, and the tangible common equity ratio was 8.52%.
Liquidity remained strong according to management, supported by $37,466 of cash and cash equivalents, approximately $319,000 of additional FHLB borrowing capacity and approximately $35,000 of unsecured federal funds lines. Regulatory capital ratios exceeded applicable minimums, and West Bank remained well-capitalized under prompt corrective action standards.
Material changes versus the prior comparable period
- Net income increased $1,278, or 20.9%, mainly from higher net interest income and lower taxes, partially offset by the new loan-loss provision and higher operating expenses.
- Average interest-earning assets increased 15.2% to $2,012,694. Average loans rose 5.5% and average investment securities rose 55.0%.
- Deposit funding costs increased materially: deposit interest expense rose $1,817, while average deposits increased 31.4% and the average rate paid on deposits increased 42 basis points.
- Net interest margin declined to 3.16% from 3.48%. Management attributed the pressure to rising deposit and borrowing costs and the lower tax-equivalent adjustment resulting from the reduced federal tax rate.
- Noninterest income declined $247, principally because Q1 2017 included a $307 gain from bank-owned life insurance that did not recur.
- Noninterest expense increased $244, mainly from salaries and benefits, occupancy, director fees and charitable contributions.
- Nonperforming loans increased to $2,107 from $622, raising nonperforming loans to total loans to 0.14% from 0.04%. Management continued to characterize overall credit quality as strong.
Guidance, outlook, risks and unusual items
- Management expects loan growth in all three markets during the remainder of 2018, citing a strong loan pipeline.
- Management expects the interest-rate environment to continue putting pressure on net interest margin during the rest of 2018.
- The allowance for loan losses was $16,465, equal to 1.10% of loans. Management considered it adequate, but noted that economic conditions, collateral values, borrower performance and regulatory reviews could require future adjustments.
- Commercial, commercial real estate, and construction lending create concentration and refinancing risks; repayment may depend on borrower operations, collateral values and refinancing availability.
- The investment securities portfolio had $10,891 of gross unrealized losses at March 31, 2018. Management attributed the losses to market conditions, did not consider them other-than-temporary, and expected full collection of principal and interest.
- The company transferred all held-to-maturity securities to available-for-sale securities on January 1, 2018. The transferred portfolio had $45,527 amortized cost and $45,890 fair value, with a $273 after-tax adjustment to accumulated other comprehensive income.
- Accumulated other comprehensive loss increased to $6,036, primarily because of unrealized investment-security losses. Comprehensive income was $3,610 versus $7,178 in Q1 2017.
- Off-balance-sheet commitments totaled approximately $617,950, including $612,165 of commitments to extend credit and $5,785 of standby letters of credit.
- Key risks include interest-rate and deposit-pricing pressure, credit deterioration, commercial and real-estate exposure, local economic conditions, competition, regulatory changes, cybersecurity and litigation. The filing reports no material change to previously disclosed risk factors and no material pending legal proceedings.
- The company adopted revenue recognition, financial instruments, hedge accounting and stranded-tax-effect guidance in 2018; management reported no material impact from these adoptions other than the securities reclassification and related presentation effects.
Important facts for investors to verify
- Whether loan growth materializes and whether the increase in nonaccrual loans remains limited.
- Trends in deposit balances, funding costs and net interest margin as market rates rise.
- The sustainability of earnings after the 2018 tax-rate benefit and without the nonrecurring 2017 bank-owned life insurance gain.
- Credit quality, charge-offs, criticized loans and the adequacy of the $16,465 allowance for loan losses.
- The market value and duration sensitivity of the available-for-sale securities portfolio and its effect on accumulated other comprehensive income and capital.
- Liquidity usage, including the increased reliance on federal funds purchased and available FHLB borrowing capacity.
- Capital ratios and dividend capacity as the Basel III capital conservation buffer becomes fully phased in.
- The company’s forward-looking statements and risk disclosures, which are subject to interest-rate, economic, competitive, regulatory and credit uncertainties.